Session 5b: The Great Depression—Banking

Bernanke suggested that the source of credit-channel effects lies in the longevity of credit disruptions. The investigate how the duration of credit-channel effects influenced macro-economic activity during the Great Depression, we employ the amortized stock of deposits in closed banks, which contains information about the time it takes to rehabilitate insolvent debtors or liquidate their collateral. As found by Bernanke and others, vector autoregression models provide evidence that changes in prices explained the largest proportion of fluctuations in industrial output. In our model the stock of closed national banks' deposits was as important as the money stock in terms of explaining output changes. Consistent with recent theoretical work on the financial system and economic growth, our new credit proxy provides evidence that the dynamic effects of credit disruptions were cumulative and pervasive during the Depression.